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MFDA Notice of Hearing

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HomeCompleted Hearings201942 - Lachman Hassaram Balani › NOH201942

This is a Third Party Document.

201942

IN THE MATTER OF A DISCIPLINARY HEARING PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA

Lachman Hassaram Balani

NOTICE OF HEARING

NOTICE is hereby given that a first appearance will take place by teleconference before a hearing panel of the Central Regional Council (“Hearing Panel”) of the Mutual Fund Dealers Association of Canada (“MFDA”) in the hearing room at the MFDA offices, 121 King Street West, Suite 1000, Toronto, Ontario on September 10, 2019 at 10:00 a.m. (Eastern), or as soon thereafter as the hearing can be held, concerning a disciplinary proceeding commenced by the MFDA against Lachman Hassaram Balani (“Respondent”).

DATED: Jun 19, 2019

"Michelle Pong"

Michelle Pong

Director, Regional Councils

Mutual Fund Dealers Association of Canada
121 King St. West, Suite 1000
Toronto, ON M5H 3T9
Telephone: 416-945-5134
Fax: 416-361-9781
E-mail: corporatesecretary@mfda.ca



NOTICE is further given that the MFDA alleges the following violations of the By-laws, Rules or Policies of the MFDA:

Allegation #1: Commencing February 13, 2017, the Respondent failed to cooperate with an investigation by MFDA Staff into his conduct, contrary to section 22.1 of MFDA By-Law No. 1.

Allegation #2: Between October 2010 and November 20, 2016, the Respondent prepared and submitted new account application forms and investment loan applications for at least two clients which the Respondent knew or ought to have known contained false, misleading or incorrect information, thereby failing to observe the high standards of ethics and conduct in the transaction of business and engaging in conduct unbecoming an Approved person, contrary to MFDA Rule 2.1.1.

Allegation #3: Between October 2010 and November 20, 2016, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain, the risks, benefits, material assumptions, features and costs of a leveraged investment strategy that he recommended to at least two clients, thereby failing to ensure that the leveraged investment recommendations were suitable for the clients and in keeping with the clients’ investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1 and MFDA Policy No. 2.

Allegation #4: Between October 2010 and November 20, 2016, the Respondent failed to ensure that the leveraged investment recommendations he made to at least two clients were suitable for the clients and in keeping with the clients’ investment objectives, having regard to the clients’ relevant “Know Your Client” information and personal and financial circumstances, including but not limited to the clients’ ability to afford the costs associated with the investment loans and withstand investment losses, contrary to MFDA Rules 2.2.1 and 2.1.1 and MFDA Policy No. 2.

PARTICULARS

NOTICE is further given that the following is a summary of the facts alleged and intended to be relied upon by the MFDA at the hearing:

Registration History

  1. From April 8, 2010 to November 20, 2016, the Respondent was registered in Ontario as a mutual fund salesperson (now known as dealing representative) with Shah Financial Planning Inc. ("Shah”), a Member of the MFDA.
  2. Prior to that, the Respondent was registered as a mutual fund salesperson with the following Members of the MFDA:
    1. Queen Financial Group Inc., from November 2009 to March 2010; and
    2. Global Maxfin Investments Inc., from October 2003 to October 2004.
  3. Shah terminated the Respondent on November 20, 2016. The Respondent is not currently registered in the securities industry in any capacity.
  4. At all material times, the Respondent conducted business in Brampton, Ontario.

Allegation #1: The Respondent’s Failure to Cooperate

  1. In or about November 2016, Shah received two client complaints concerning the Respondent.
  2. The clients alleged, among other things, that the Respondent had made unsuitable leveraging recommendations, failed to discuss the material risks and features associated with borrowing to invest and failed to explain how the investments they made with borrowed funds operated.
  3. Upon being informed by Shah of the complaints, Staff commenced an investigation of the Respondent’s activities. Among other things, Staff sent letters to the Respondent on February 13, 2017, March 14, 2017 and March 29, 2017 requesting that the Respondent contact Staff to schedule an interview concerning the subject matter of the complaints.
  4. The Respondent has failed or refused to reply to Staff’s letters and has never contacted Staff to schedule an interview. As a result of the Respondent’s failure to cooperate with Staff’s investigation, Staff has been unable to determine the full nature and scope of the Respondent’s activities and, in particular, whether other clients may have been affected by his actions.
  5. By engaging in the conduct described above, the Respondent failed to cooperate with MFDA Staff during the course of an investigation into his conduct, contrary to section 22.1 of MFDA By-Law No. 1.

Allegations #2 to #4: The Leveraged Investment Strategy

Overview of the Leveraged Investment Strategy

  1. Between October 2010 and November 20, 2016, the Respondent recommended and facilitated the implementation of a leveraged investment strategy in the accounts of at least two clients (the “Leveraged Investment Strategy”). As part of the Leveraged Investment Strategy, the clients were directed by the Respondent to obtain investment loans and use the proceeds of the investment loans to purchase return of capital (“ROC”) mutual funds for their accounts.[1] The ROC mutual funds recommended by the Respondent were subject to deferred sales charges (“DSC”).
  2. The Leveraged Investment Strategy was based, in part, on the premise that the investments would generate sufficient proceeds each month to at least equal the clients’ costs of servicing their investment loans and, if additional proceeds were realized, the clients could use the extra amounts to supplement their lifestyle. The Leveraged Investment Strategy was also purportedly structured to eliminate or minimize the tax consequences the clients would face when they made monthly withdrawals from their registered accounts to service their investment loans as part of the strategy.
  3. In the course of recommending the Leveraged Investment Strategy to the two clients, the Respondent made one or more of the following representations:
    1. the Leveraged Investment Strategy would pay for itself such that the clients would not have to incur any out-of-pocket expenses in order to sustain the strategy;
    2. the ROC mutual funds they purchased could be relied upon to pay monthly or annual proceeds to the clients, and such proceeds were guaranteed and would not be reduced or stopped;
    3. the proceeds paid by the ROC mutual funds to investors would be sufficient to pay (or greater than) the costs associated with the clients’ investment loans, such that the Leveraged Investment Strategy would pay for itself;
    4. to the extent that the proceeds paid by the ROC mutual funds to investors exceeded the clients’ costs of servicing their investment loans, the Leverage Investment Strategy would provide a source of income for the clients to pay living expenses or enjoy an increased lifestyle, to purchase additional investments, or to purchase other products or services from the Respondent, such as life insurance policies;
    5. the ROC mutual funds would not decrease in value and would continue to grow in value over time; and
    6. the Leveraged Investment Strategy was low risk.

Implementation of the Leveraging Investment Strategy

  1. The two clients relied upon the Respondent’s recommendations to open accounts at Shah, and to apply for and obtain investment loans totaling $193,214 from B2B Bank, as set out below:

Client

Date of Loan

Loan Amount

MS

October 27, 2010

$50,000

DS

October 27, 2010

November 15, 2011

May 22, 2013

$50,000

$45,000

$48,214

  1. Relying upon the Respondent’s recommendations, the two clients used the proceeds of their investment loans to purchase a ROC mutual fund offered by Marquest Asset Management (“Marquest”), the Marquest Monthly Pay Fund[2], as set out below:

Client

Amount

ROC Mutual Fund Purchased

Purchase Date

MS

$50,000

Marquest Monthly Pay Fund

October 27, 2010

DS

$50,000

$45,000

$48,214

Marquest Monthly Pay Fund

Marquest Monthly Pay Fund

Marquest Monthly Pay Fund

October 27, 2010

November 15, 2011

May 22, 2013

  1. The Marquest Monthly Pay Fund was sold to the clients on a DSC basis.
  2. All distributions paid out by the Marquest Monthly Pay Fund to the two clients were paid to the clients’ bank accounts and used to service the costs of their investment loans. To the extent the two clients had any monies left over after paying their investment loan costs, the Respondent represented to the clients that they could use such monies to fund their lifestyle.

Performance of the Leveraged Investment Strategy

  1. Every year between 2010 and 2016, the distributions paid out by the Marquest Monthly Pay Fund remained constant at $0.90 per unit, however the proportion of the distributions consisting of a return of the clients’ capital increased from 86% of the distributions in 2010 to 100% of the distributions commencing in 2014. The value of the Marquest Monthly Pay Fund held by the clients declined from a unit value of $7.41 in 2010 to $2.41 in 2016.
  2. Because of the decline in value of the Marquest Monthly Pay Fund held by the clients, the total value of the clients’ investments declined below the outstanding principal amount of their investment loans. Consequently, the clients were not in a position to sell their ROC mutual funds and use the sale proceeds to pay down their investment loans without incurring a shortfall for which they would be responsible.
  3. In July 2016, B2B Bank sent a letter to all individuals who had obtained investment loans from the bank to purchase the Marquest Monthly Pay Fund, including clients MS and DS, informing them of their investments’ losses and suggested the following to minimize further erosion of their investments:
    • Switch out the entirety of their investments held in the Marquest Monthly Pay Fund to non-ROC mutual funds;
    • To the extent they were not reinvesting the distributions paid out by the Marquest Monthly Pay Fund, to immediately commence reinvesting such distributions in the leveraged investment accounts into eligible non-ROC mutual funds;
    • Pledge, or increase, additional monies or investments into their leveraged accounts as collateral in an amount sufficient to ensure that investments held in the accounts (in non-ROC mutual funds) becomes equal to, or greater than, 100% of the clients’ outstanding loan balance; or
    • Pay down their investment loans in full.
  4. On October 13, 2016, B2B Bank sent a second letter to individuals who had obtained investment loans from the bank to purchase the Marquest Monthly Pay Fund, including clients MS and DS. In this letter, B2B Bank stated that:
    1. it would instruct Marquest Asset Management Inc. to suspend return of capital cash distributions made directly to the individuals’ bank accounts from the Marquest Monthly Pay Fund on October 14, 2016, including clients MS and DS; and
    2. it would instead direct all future distributions made by the Marquest Monthly Pay Fund to a B2B Bank investment account to be held as eligible collateral against the clients’ investment loans (“B2B’s Instructions”).
  5. Commencing October 14, 2016, and as a result of B2B’s Instructions, the monthly proceeds received by clients MS and DS went down to $0 and the clients had insufficient funds to cover the costs of servicing their investment loans. The clients were eventually forced to incur out-of-pocket expenses, which they had difficulty affording or were unable to reasonably afford, in order to sustain the Leveraged Investment Strategy.
  6. On November 7, 2016, clients MS and DS both filed complaints with Shah with respect to the suitability of the Leveraged Investment Strategy. Shah conducted a review and investigation of the complaints and provided compensation to both clients.

Allegation #2: False, misleading and incorrect account opening and loan documents

  1. The Respondent completed the documents required to implement the Leveraged Investment Strategy in the accounts of clients MS and DS, including the Shah New Account Application Forms (“NAAFs”) and the B2B Bank investment loan applications, without discussing the contents of the documents with the clients. The Respondent then had the clients sign the fully completed documents without reviewing the contents of the documents with the clients adequately or at all.  Consequently, the clients’ documented Know-Your-Client information did not accurately reflect the clients’ actual personal and financial circumstances in material respects.
  2. The Respondent completed the clients’ documents so that the information recorded on the documents complied or substantially complied with Shah’s minimum requirements permitting the use of leveraging. Shah’s policies and procedures stated that leveraging was only suitable for those clients that met the following criteria, among other factors:
    1. an investment knowledge of that is not “none”, “limited”, “low” or “poor”;
    2. an investment time horizon of not less than “6 to 9 years” or “long term” time horizon;
    3. a minimum “medium” risk tolerance;
    4. the clients’ “debt payments should not exceed 35% of the clients’ gross income” (“debt to income ratio”); and
    5. the borrowed monies did not exceed 30 percent of clients’ net worth (“loan to net worth ratio”).[3]
  3. The Respondent recorded the investment knowledge of clients MS and DS as “moderate” when he knew or ought to have known that the clients’ actual investment knowledge was limited to nil. The clients were new clients to Shah and neither one of them had any prior experience investing in mutual funds or any other types of securities.
  4. The Respondent recorded the investment risk tolerance of clients MS and DS as “aggressive” when he knew or ought to have known that the clients’ actual investment risk tolerance was “low”.
  5. The Respondent recorded false income and asset information for clients MS and DS on their B2B Bank investment loan applications, which was contrary to the income, assets and liabilities information that had been provided to him by clients MS and DS. In both instances, the Respondent had clients MS and DS sign completed investment loan applications containing the clients’ accurate income, assets and liabilities information, then altered some or all of such information on the investment loan applications he submitted to B2B Bank.  In both instances, the Respondent falsified the clients’ income, assets and/or liabilities information in order to ensure that the clients’ information complied with Shah’s minimum requirements permitting the use of leveraging, including debt to income and loan to net worth ratios.
  6. In the case of client MS, had the Respondent submitted accurate investment loan applications to B2B Bank for her, client MS’s debt to income ratio would have been 47%, and her loan to net worth ratio would have been 375%, both in excess of Shah’s leveraging guidelines. Instead, the investment loan applications submitted by the Respondent to B2B Bank for client MS recorded the client’s debt to income ratio as 29%, and her loan to net worth ratio as 25%.
  7. In the case of client DS, had the Respondent submitted accurate investment loan applications to B2B Bank for him, client DS’s debt to income ratio would have been 78%, and his loan to net worth ratio would have been 29%. Instead, the investment loan applications to B2B Bank for client DS recorded the client’s debt to income ratio as 58%, and his loan to net worth ratio as 26%.
  8. By engaging in the conduct described above, the Respondent failed to observe high standards of ethics and conduct in the transaction of business and engaged in conduct unbecoming an Approved Person, contrary to MFDA Rule 2.1.1

Allegation #3: Failure to Explain the Leveraged Investment Strategy

  1. At all material times, clients MS and DS relied on the Respondent’s recommendations with respect to the Leveraged Investment Strategy and his explanations, to the extent he provided any, of the risks, benefits, material assumptions, features and costs of the Leveraged Investment Strategy.
  2. The Respondent misrepresented, failed to fully and adequately explain, or omitted to explain, the following risks, benefits, material assumptions, features and costs, among others, of the Leveraged Investment Strategy to the clients:
    1. the risk that the mutual funds purchased with the investment loans may decline in value, such that the clients may not be able to sell the mutual funds and use the proceeds to pay down the entirety of the principal amount of their investment loans;[4]
    2. the risk that the mutual funds purchased with the investment loans may not pay the clients sufficient monthly proceeds to sustain or justify the strategy;
    3. the risk that an increase in interest rates may affect the clients’ ability to sustain the strategy if the clients did not have additional sources of income or savings to cover the additional costs of servicing their investment loans;
    4. the risk that the clients may not be able to sustain the strategy if they exhausted the savings in their registered accounts (which the Respondent directed them to use to pay the costs of servicing their investments loans); and
    5. the risk that the clients may sustain losses if they were required to sell their mutual funds earlier than anticipated and incurred DSC fees upon redemption.
  3. The Respondent obtained Leverage Disclosure Documents signed by the clients prior to implementing Leveraged Investment Strategy in their accounts but failed to adequately review and explain the contents of the documents to the clients to ensure that they understood and accepted the risks of using borrowed monies to invest.
  4. By engaging in the conduct described above, the Respondent misrepresented, failed to fully and adequately explain, or omitted to explain the risks, benefits, material assumptions, features and costs of the Leveraged Investment Strategy to clients MS and DS, thereby failing to ensure that the Leveraged Investment Strategy was suitable for the clients and in keeping with the clients’ investment objectives, contrary to MFDA Rules 2.2.1 and 2.1.1 and MFDA Policy No. 2.

Allegation #4: Unsuitable Leveraging Recommendations

  1. The Leveraged Investment Strategy recommended and implemented by the Respondent in the accounts of clients MS and DS was not suitable for the clients and in keeping with their investment objectives, in that, among other reasons:
    1. the clients’ investment knowledge was limited to nil;
    2. the clients’ investment risk tolerance was low;
    3. the clients were not able to service the investment loans using their own personal income. The clients had mortgages and other expenses that consumed a significant portion of their income.  As a consequence, neither one of the clients had sufficient personal income to cover the costs of servicing their investment loans in the event that the proceeds paid by the ROC mutual funds to investors were reduced, suspended or cancelled; and
    4. the clients did not have sufficient financial resources to withstand investment losses if the Leverage Investment Strategy did not perform as the Respondent represented it would.
  2. By engaging in the conduct described above, the Respondent failed to ensure that the leveraged investment recommendations he made to clients MS and DS were suitable for the clients and in keeping with the clients’ investment objectives, having regard to the clients’ relevant “Know Your Client” information and financial circumstances, including but not limited to the clients’ ability to afford the costs associated with the investment loans and withstand investment losses, contrary to MFDA Rules 2.2.1 and 2.1.1 and MFDA Policy No. 2.

NOTICE is further given that the Respondent shall be entitled to appear and be heard and be represented by counsel or agent at the hearing and to make submissions, present evidence and call, examine and cross-examine witnesses.

NOTICE is further given that MFDA By-laws provide that if, in the opinion of the Hearing Panel, the Respondent:

  • has failed to carry out any agreement with the MFDA;
  • has failed to comply with or carry out the provisions of any federal or provincial statute relating to the business of the Member or of any regulation or policy made pursuant thereto;
  • has failed to comply with the provisions of any By-law, Rule or Policy of the MFDA;
  • has engaged in any business conduct or practice which such Regional Council in its discretion considers unbecoming or not in the public interest; or
  • is otherwise not qualified whether by integrity, solvency, training or experience,

the Hearing Panel has the power to impose any one or more of the following penalties:

  1. a reprimand;
  2. a fine not exceeding the greater of:
    1. $5,000,000.00 per offence; and
    2. an amount equal to three times the profit obtained or loss avoided by such person as a result of committing the violation;
  3. suspension of the authority of the person to conduct securities related business for such specified period and upon such terms as the Hearing Panel may determine;
  4. revocation of the authority of such person to conduct securities related business;
  5. prohibition of the authority of the person to conduct securities related business in any capacity for any period of time; and
  6. such conditions of authority to conduct securities related business as may be considered appropriate by the Hearing Panel.

NOTICE is further given that the Hearing Panel may, in its discretion, require that the Respondent pay the whole or any portion of the costs of the proceedings before the Hearing Panel and any investigation relating thereto.

NOTICE is further given that the Respondent must serve a Reply on Enforcement Counsel and file a Reply with the Office of the Corporate Secretary within twenty (20) days from the date of service of this Notice of Hearing.

A Reply shall be served upon Enforcement Counsel at:

Mutual Fund Dealers Association of Canada
121 King Street West
Suite 1000
Toronto, ON M5H 3T9
Attention: Francis Roy
Email: froy@mfda.ca

A Reply shall be filed by:

  1. providing four copies of the Reply to the Office of the Corporate Secretary by personal delivery, mail or courier to:
    1. The Mutual Fund Dealers Association of Canada
      121 King Street West
      Suite 1000
      Toronto, ON M5H 3T9
      Attention: Office of the Corporate Secretary; or
  2. transmitting one electronic copy of the Reply to the Office of the Corporate Secretary by e-mail at CorporateSecretary@mfda.ca.

A Reply may either:

  1. specifically deny (with a summary of the facts alleged and intended to be relied upon by the Respondent, and the conclusions drawn by the Respondent based on the alleged facts) any or all of the facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing; or
  2. admit the facts alleged and conclusions drawn by the MFDA in the Notice of Hearing and plead circumstances in mitigation of any penalty to be assessed.

NOTICE is further given that the Hearing Panel may accept as having been proven any facts alleged or conclusions drawn by the MFDA in the Notice of Hearing that are not specifically denied in the Reply.

NOTICE is further given that if the Respondent fails:

  1. to serve and file a Reply; or
  2. attend at the hearing specified in the Notice of Hearing, notwithstanding that a Reply may have been served,

the Hearing Panel may proceed with the hearing of the matter on the date and the time and place set out in the Notice of Hearing (or on any subsequent date, at any time and place), without any further notice to and in the absence of the Respondent, and the Hearing Panel may accept the facts alleged or the conclusions drawn by the MFDA in the Notice of Hearing as having been proven and may impose any of the penalties described in the By-laws.

End.

  1. [1] “Return of capital” mutual funds are structured to pay a set monthly amount of proceeds to an investor which may include a return of the capital originally invested by the investor.   In the event the value of a ROC mutual fund declines due to deteriorating market conditions, poor investment performance or other factors such that the amount of the promised monthly proceeds exceeds the increase in the value of the fund, there is a risk that the fund will be required to reduce, suspend or cancel the monthly proceeds paid to investors.
  2. [2] At the time of purchase, the Marquest Monthly Pay Fund was known as the Matrix Monthly Pay Fund, which was issued by Matrix Asset Management Inc. (“Matrix”).  On September 17, 2013, Marquest and Matrix concluded an asset purchase agreement wherein Matrix sold to Marquest the portfolio management and related contracts of the Matrix Group of Mutual Funds, including the Matrix Monthly Pay Fund.
  3. [3] At times between 2006 and 2008, WFG’s policies and procedures stated that borrowed monies were not to exceed 50 percent of clients’ net worth.
  4. [4] The Respondent led the clients to believe that the mutual funds purchased with the investment loans could be counted on to almost double by the end of the loans’ terms.

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